Most people are familiar with the trendy, hot, new restaurant that closes just a few months after it opens. Having a reservation waitlist and a high-end menu is no guarantee that a restaurant will turn a profit. This is true for any type of small business. As many frustrated business owners have found out, it's possible to increase sales month-after-month while still losing money. The key to a successful business is not in how much money you make, but how much of it you keep. And the only way to know for sure is to pay attention to the numbers your accountant talks about. Without a steady net income growth, there is no way to keep a business open for any length of time.
Gross Versus Net
The money your business pulls in each day, through the sales of either products or services, is known as the gross income. That's strictly the total amount of cash that comes into your business account each day, but it's not how much your business is making. To figure that out, you have to account for all your expenses such as labor costs, the price of raw materials, the cost of advertising and the price of rent on your building. Once you subtract all the expenses your business has incurred during a specific period, whatever's left of what you made during that period is your net profit.
Calculating Net Income Growth
It's often said, that in the business world if you're standing still you're falling behind. Businesses need to make more profit each year than they did the previous one. When you take into account the increase in the cost of living and the need for savings and possible future expansion, last year's profit can add up to a loss in today's economy.
You have a wide variety of methods for increasing your bottom line, from cost-cutting to marketing, but you have to know where you are before you can plan where you want to go. Is your business growing at a satisfactory rate? You can only know this by looking at your net income growth from quarter-to-quarter or from year-to-year.
Calculate your business's net income growth by subtracting this period's net profit from the previous period's net profit. You can use this year versus last year, this quarter versus last quarter or this quarter versus the previous year's comparable quarter. Just make sure you're comparing apples to apples. For example, it would not be useful to compare a quarter in low-season to a quarter in high-season. Take the difference and divide it by the net profit from the last period, then multiply that number by 100. This will give you a percentage growth rate between the two periods of time.
For example, if your business posted a net profit of $300,000 last year and a net profit of $360,000 this year, the difference between the two years is $60,000. Divide this by last year's net profit, $300,000, and you get 0.2. Multiply this by 100 and you'll find a strong 20- percent net income growth over last year.